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Updated: Tue, 25 Mar 2014 08:00:00 GMT | By Arshy Mann

Untangling Canada's proposed new crowdfunding laws

Two sets of rules across seven provinces


Kickstarter Co-founder Yancey Strickler. (© Charles Esherman/WireImage)

Kickstarter Co-founder Yancey Strickler. (Charles Esherman/WireImage)

Canada's patchwork of securities regulators released new prospective rules on crowdfunding yesterday. While crowdfunding has become a common way to raise money for individual projects, like a line of smart watches , a new Veronica Mars movie or a crack video , regulators have been wary of allowing companies to sell equity in the same way. While critics argue that crowdfunding is a perfect vehicle for fraudsters looking to target less-knowledgeable investors, it could also be a valuable source of capital for small businesses .

Most of the provincial securities regulators, with a few notable exceptions, have put out the call looking for public comment on the proposed rules. Essentially, there are two sets of possible rules being considered: the start-up exemption and the crowdfunding exemption. And because it's Canada, the different provinces are taking a fragmented approach.

Here's the quick rundown of both sets of rules.

The Start-Up Exemption

The start-up exemption is aimed at early-stage companies. They can’t raise as much money, but the standards are generally less strict.

Who can use it?

A company that wants to utilize crowdfunding has to have its head office in whatever province the listing is being done through. It has to be a "non-reporting issuer," which just means that it can't be listed on a stock exchange. Also, investment funds aren't eligible.

How much can you raise?

A company can raise up to $150,000 per offering, with a limit of two offerings a year-so a maximum of $300,000 annually. Individual investors can only put in $1,500 per offering. The listing can remain open for up to 90 days.

What about the crowdfunding website?

Any crowdfunding portal has to have a head office in a participating province and everyone involved has to be a Canadian resident. The website doesn't have to register with a security regulator, but it does have to make sure it doesn't provide any investing advice or have a relationship with one of the companies raising money through it.

Which provinces are considering it?

Saskatchewan already implemented this back in December. B.C. is considering this exclusively, while Manitoba, Quebec, New Brunswick and Nova Scotia are considering both the start-up exemption and the crowdfunding exemption.

The Crowdfunding Exemption:

The crowdfunding exemption is aimed at slightly later-stage companies, so the amount of money a company can raise is a lot higher, but the crowdfunding websites are monitored much more closely.

Who can use it?

The company has to be incorporated in Canada, its head office has to be in Canada and a majority of its board must be Canadian residents. But-unlike the start-up exemption-companies that are listed on stock markets are eligible.

It's not available to investment funds, real estate issuers that aren't listed on a stock market or any company that hasn't written a business plan.

How much can you raise?

A company could raise up to $1.5 million per year, with individual investments capped at $2,500 per offering and a maximum of $10,000 per year, per investor. So the dollar figures involved are considerably higher than the start-up exemption.

What about the crowdfunding website?

Unlike the start-up exemption, the website must register with the relevant securities regulator and is subject to a number of strict standards, including minimum capital requirements, insurance and strict record-keeping. The portals are responsible for making sure the companies they're listing are legitimate by doing background checks on the company's directors, officers and promoters as well as fact-checking the information they present to investors. These websites can't provide investment advice and have to avoid any conflicts of interest with the companies they're listing.

Which provinces are considering it?

Ontario is looking at this model exclusively and Saskatchewan is only getting comment for this, since they've already implemented the start-up exemption. Manitoba, Quebec, New Brunswick and Nova Scotia are looking at both exemptions.

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